The Payroll Protection Program was a tremendous lifeline for contractors when it was first introduced. The program provided some needed certainty and liquidity for contractors as projects started getting canceled. With close to 1 million construction jobs lost in April, the PPP gave contractors a way to keep their people working and to have the loan completely forgiven if the proceeds were used for payroll. According to one recent study, 80% of the responding contractors obtained a PPP loan. (Read more about how it affects contractors and surety bonding here.)
Unfortunately, after issuing the loans, the government has continued to add panic for contractors and other businesses that pursued these loans by retroactively adding requirements and threatening prosecution. Companies applying for the PPP loan originally had to certify that the funds were needed due to the current economic uncertainty. While these concerns exist, the U.S. Treasury has sought to address them and the Paycheck Protection Flexibility Act, passed by both the House and Senate as of June 3, awaits President Trump’s signature. The act will assist many businesses with present PPP-related issues, as well as provide additional clarity and guidance.
Subsequently, the Treasury Department added the additional section to their Frequently Asked Questions page.
This new guidance requires contractors and other businesses to consider other forms of liquidity and contemplate whether such a loan was “necessary,” leaving many contractors to wonder what “necessary” means. Many have contemplated returning the funds for fear of prosecution under the Federal False Claims Act.
On May 13, the SBA and Treasury provided an update for companies that borrowed less than million. Question #46 of the Frequently Asked Questions Page asks, “How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?”
The answer is important as it provides a safe harbor to contractors and other businesses that borrowed less than $2 million under the PPP from the certification requirement. Although this is great for those contractors, what about larger contractors who borrowed more under the PPP? As of this date, it appears that those loans will be subject to review and scrutiny.
Surety is an important part of operations for many construction companies. As such, many surety bond companies have begun to weigh in on whether these loans to contractors were “necessary.”
Contractors are encouraged to consult with an attorney and CPA on this topic, but here are some common thoughts that may help contractors and their advisors make better decisions about whether these PPP loans were in fact “necessary”:
Reduced Opportunities—Construction is a business where new work needs to be constantly acquired to replace work being completed. If new work cannot be obtained, losses occur quickly as it is often hard to reduce overhead the same rate. Losses also reduce liquidity and net worth which are two key factors in providing contractors with surety credit.
All these things can have a catastrophic impact on contractors. Dodge Analytics show that construction starts were down 25% from March to April. Further, The Architectural Billings Index which is often leading indicator of construction activity dropped 20.1 points in a single month. To put that into perspective, the index dropped 8.3 points at the start of The Great Recession.
Contractors and their advisors should weigh these things when considering if the PPP loan was necessary.
Bank Debt—Contractors may have bank lines of credit available which could be considered other sources of liquidity, but can a contractor access these lines without be a detriment to their business? A key factor in surety underwriting is a contractor’s use of debt. Bond companies consider bank lines of credit a cushion of last resorts. Significant borrowings against those lines could prevent a contractor from getting bonding. Even the SBA’s own Surety Bond Guarantee program utilizes unused portions of a contractor’s bank line as a basis for providing surety credit. Contractors and their advisors should consider whether accessing these lines would be detrimental to a contractor’s business.
Accounts Receivables Are at Risk—Working capital is vital to bonding. Usually much of a contractor’s working capital is compiled of accounts receivable. That is because they are normally not allowed to contractually bill for their work until that portion of work has been completed. Sureties heavily rely on the age and collectability of accounts receivables when extending credit to contractors. The current COVID-19 environment may put those accounts receivables at risk and a contractor may not know that there is a payment issue for some time. The inability to collect receivable would not only be detrimental to a contractor’s surety credit, it could also put them out of business.
Certainly a lot is on the line for businesses, which depend on PPP loans as a vital lifeline during the present pandemic. Contractors are highly encouraged to seek legal, accounting and surety advice as they navigate these ever-changing waters.
